Dura Pharmaceuticals v. Broudo
Dura Pharmaceuticals, Inc. v. Broudo
Broudo and a group of investors purchased Dura Pharmaceutical (Dura) securities after a series of positive statements by Dura regarding its Albuterol Spiros respiratory delivery device, a medical device. Several months later, Dura revealed that the FDA would not approved the device due to reliability issues. Upon release of the FDA decision, Broudo alleged Dura and its officials had made misleading statements about the device in violation of section 10(b) of the Securities and Exchange Act. Specifically, Broudo alleged that Dura had indicated satisfactory development and testing of the device while knowing the device had significant reliability issues. The district court dismissed Broudo’s complaint for failing to properly plead the loss causation element of the 10(b) violation. According to the court, the loss causation element requires the plaintiff to prove a causal connection between the alleged fraud and a subsequent decline in stock price. Since Broudo failed to establish a connection, the district court dismissed the plea.
The Ninth Circuit Court of Appeals reversed, holding the loss causation element of a 10(b) violation does not require proof of a causal connection between the alleged fraud and a decline in stock price. According to the court, “plaintiffs establish loss causation if they have shown that the price on the date of the purchase was inflated because of the misrepresentation.” The court determined Broudo had presented enough support for his allegation that Dura’s stock price was inflated due to fraud to survive a motion to dismiss.
Question Presented:
Whether a securities fraud plaintiff invoking the fraud-on-the-market theory must demonstrate loss causation by pleading and proving a causal
connection between the alleged fraud and the investment’s subsequent decline in price.
